0:00 Welcome to the Crazy Wisdom podcast. I've got Paul Sztorc here, and he is the CEO at LayerTwo Labs. 0:07 Welcome to the show. Hey, thanks for having me. So there's a bunch of different places we could 0:13 go. Let's start with Zcash. What is the relationship between Bitcoin and Zcash? 0:20 Well, currently, unfortunately, there's not enough of a relationship. So Zcash is a variant of the 0:28 blockchain design where the sender, the receiver, and the amounts are all hidden. They're all not 0:34 obvious. But in the Bitcoin blockchain, you can see at least the unique key pair, the public key 0:41 of the sender and the receiver, and you know how much was sent in a given transaction. So it's not 0:46 as private as people would have liked, and that's why Zcash was invented as an alternative. One of 0:53 the many projects that we work on at LayerTwo Labs is taking that same privacy technology and 1:00 putting it as an optional LayerTwo on Bitcoin so that you can move the coins from L1 to this L2, 1:07 and over there, you have the same experience that users of the Zcash altcoin have. 1:13 Very cool. So it's a LayerTwo. You're building LayerTwo as an easy mechanism for transferring 1:21 Bitcoin to Zcash? Did I get that right? 1:23 Not quite. Zcash is like you have to separate the technology stack of Zcash and the code 1:29 from the altcoin. It's made its own project. Zcash is its own project, and they have their own 1:38 altcoin that's separate from the 21 million BTC. And we try to reuse a similar idea, the ZK 1:47 snark or this zero-knowledge cryptography, and we make it so that you can take your Bitcoin and put 1:53 it in a new zone, and in this new zone, it has the same attributes that the Zcash altcoin would 1:59 have with its software, but this is only with Bitcoin. So it's the same 21 million Bitcoin, 2:04 but the Zcash feature. Okay, got it. So this is not related. So it's more having to do with ZK 2:13 proofs. Yeah, it's more about bringing the features from altcoin to Bitcoin, but not 2:21 bringing the altcoin. And so the idea is you have 21 million Bitcoin, but we'd have whatever 2:25 features you want. You have Ethereum, smart contracts, you have Zcash, privacy, etc., etc. 2:30 You could have different block sizes or different, you could write the blockchain in a different 2:36 language. So Bitcoin Core isn't C++, but you could just have, the L2 could be whatever you like. 2:42 So how does it work to have it? I have heard in the past, I haven't looked into it very deeply, 2:46 but I've heard that L2, layer twos on Bitcoin have been slow and haven't worked that well. 2:53 Is that accurate? What are some other, is Rootstock a layer two? 2:58 Yes, but you're in good company if you're confused about Rootstock, because that's what 3:02 everyone is. And even I, sometimes I'm like, what are they doing over there? And they did all this 3:06 fundraising back in 2015. There's a huge amount of money and it's like, what, I don't know what's 3:11 exactly going on over there. And another reason is that we built our own, it was kind of a little 3:17 bit of a toy, but we basically forked Geth, the Ethereum full node, and we made it into a Bitcoin 3:23 L2 as a kind of demo. And we did that like in 20, maybe 2023. And this only took like maybe 3:30 a month or two. But that was supposed to be Ethereum, excuse me, that was supposed to be 3:34 Rootstock's project was Ethereum on Bitcoin. But then we were doing it in like two months and 3:40 it's been 10 years. So I don't know. No one knows. I mean, I like, the Rootstock people are great. 3:46 I love Sergio and Diego and they're very neat. But it is confusing. I don't mean to criticize 3:55 them, but I think that they definitely could do a better idea of saying, this is what we want to 4:00 make and here it is, because we've been working on it for 10 years. So I agree with you that a lot of 4:06 the L2s aren't good. And in fact, I created this company and I created all this work because I 4:14 looked around and I thought that all this is terrible and it could be much better. So I think 4:18 they are not very good. And unfortunately, I think it's a very difficult thing to convey without 4:23 someone running the software themselves and seeing for themselves like exactly what happened. 4:27 There's also another difficulty in explaining it, which is that there's like a lot of people 4:32 just lying out there to get more favorable attention or deals or whatever, 4:39 or they want to launch something. So there's not a lot of incentive, to be honest. And it's 4:45 also just kind of confusing, like every technical thing. It's very easy to just paper something over 4:51 and say, oh, it works as a demo. It works on our website or something like that. 4:57 It's very hard to actually prove something out in the battle-tested arena where it's going to be 5:03 attacked by maybe hackers or come under some kind of stress that would require decentralization. 5:10 So for something to be battle-tested is really, really hard and it's very easy for imitators to 5:16 steal the valor or however you might call it. So it's very hard to explain. And unfortunately, 5:22 I think it's going to be like .com or something where there's like tons of scams and then at the 5:27 end, there will be a few people left standing. I'm a little bit pessimistic on explaining it 5:32 to people, having tried to do this for 10 years, explain why these L2s aren't very good, 5:37 why they probably have no future, what we should do instead. And I've had some success with that, 5:44 but not enough to move the whole Bitcoin culture to where I think it should be. 5:50 So I think it's going to take a little while. Yeah, well, and so what you said about a bunch 5:55 of scams and sort of like it all blowing up, I told some podcast guests in the past, 6:01 I told them that that's going to happen, right? There's going to be a Great Depression-like event 6:06 for crypto. And they're like, that was 2022. That was FBF. That was like a crypto winter, 6:13 basically, where it all destroyed, right? FTX, yeah. 6:17 Well, that was an example. Yeah, I think we definitely go through cycles of 6:21 optimism and then unfair pessimism. But this is a common pattern also, which is that, for example, 6:32 so for example, with Theranos, there was this scam blood company that maybe people are familiar 6:36 with. But when that comes out, it's so-called sucks the air out of the room. In other words, 6:43 if you wanted to start a blood company at the time, it would not be possible because everyone 6:48 would say, well, how are you going to compete with Theranos? Theranos is this great, great, 6:50 great company. So when there's the delusional optimism, it's bad for all the good ideas. 6:58 And then when Theranos collapses, now how are you going to start a blood company now? Because 7:02 everyone's going to be very wary and skeptical. Most people are not, unfortunately, it pains me 7:09 to say this, I wish it weren't the case, but most people are very superficial and they only see the 7:17 cosmetic surface and they just think blood company bad or whatever. So this has happened in Bitcoin, 7:23 where the L2s of Lightning doesn't work very well. The other L2s are kind of not real with the 7:31 extent of talking about liquid or even like fetament. These are like cheating by just 7:38 masking multi-sig as L2. This has also happened in Ethereum, where it's just multi-sig. A multi-sig 7:42 where a bunch of strangers or even one person who has all the key, because you have no idea how they 7:46 do the multi-sig ceremony. One person can just take all the money immediately. So this led to 7:51 the so-called custodial L2s, which is again, that is just like kind of saying like a dry ocean or 7:59 something. But this is just a language game that people have played to keep the grift going. And 8:06 so it's going to be very difficult to untangle all the nonsense, but there you go. 8:10 Yeah. Well, I mean, and that's just not within crypto as well. That's the 8:14 strangest thing about the state of the world over the past few years is that 8:20 I come from Silicon Valley and I come from a Silicon Valley. I was born and raised there. 8:24 And a lot of the people that I grew up with are really involved with that early wave 8:29 and during that time, none of the, I mean, there was BS like Oracle, Oracle famous, 8:35 maybe not so famously, but in 2001, Larry Ellison did what he's doing today, which is basically 8:40 making up numbers about how they're going to have $300 billion in contracts over the next years with 8:45 open AI. Sam Altman's also pretty good at that. So, you know, like there have been hucksters before 8:51 and I'm not calling Sam Altman a huckster, like Oracle that in 2001, he did actually make up 8:56 numbers. So like there are people who essentially oversell and then either 9:03 deliver or under deliver, but it doesn't matter at that time because they've already got the 9:08 attention and all you really need to get is their attention. So that existed in the Bay Area, 9:15 but then it wasn't like fully into it. And then starting with the social media companies, 9:21 particularly Facebook, I mean, Facebook is just like the guy was buying VPNs to spy on users. 9:28 There's so many things that that guy has done that are clearly outside the bounds of what 9:32 Western culture promotes in its values and what Silicon Valley used to promote. And so that 9:37 created this whole giant narcissism bubble that just kept on going. And then crypto came into it 9:42 and crypto tied money to it. But there is a value, like there is a huge value in Bitcoin. I think 9:48 there's value in Ethereum. I think there's value in Chainlink. I like those companies and this is 9:55 not investment advice, but so there is something real to it. But the process you mentioned, 10:02 which is really real as well, and that leads to a sort of media technology question because 10:09 what created those in the 2010, from 2010 to 2020, you had all of a sudden social media 10:15 mixing with the TV. So the TV could broadcast to hundreds of million people and then it mixed with 10:20 social media so that hundreds of million people could be directed to these social networks. 10:24 The TV no longer works. A recent podcast guest heard what I just said here now and was like, 10:32 yeah, it's true. It is breaking down, but at least like one to two billion people, 10:37 maybe a lot more than that, know that Donald Trump is president. So we don't all have 10:41 synchronous attention all at the same time, but we definitely are breaking down to the sense that 10:46 the TV can mediate that in such a reliable way that you could have a hundred million people 10:52 watching the Seinfeld episodes. So that long rant was basically to say that I think what you're 10:57 talking about is going away and that people are like, I think there's going to be a lot of builders. 11:02 There already are a lot of builders out there building these things and they'll get the attention 11:08 that they need when it comes. What do you think? Do you think I'm on to something there? 11:12 Do you disagree? I do think that eventually, I do think that on a long enough time frame, 11:19 the frauds are all found out. So maybe they drag a lot of good people down with them or 11:25 innocent victims. Also, I think that's also common, but I do think you can't really get away with it 11:31 forever. I do think that it's easy, like your example, before the election, it's very difficult 11:40 to tell who's going to win or even who's currently in the lead and everyone's got an opinion. And 11:46 then over time, it sort of becomes clearer. Even on election day, it could be a photo finish. 11:54 And then even a few days afterwards, it might not be totally clear, but then over time, 11:58 it becomes extremely clear and people just give up on anyone who tried to push a conspiracy 12:04 theory saying that that's actually Kamala in a wig or in a suit or something. 12:09 They just give up on that. So that shifts out of the Overton window. So I think that's true. 12:16 I think we do want to do everything we can to bring the truth forward in time. We don't 12:24 want to stall progress. I think that would be 12:32 sad because there would be needless suffering for no reason. 12:36 Well, that gets into the take about the information age because everything we just 12:39 talked about, we're in the information age now. The industrial age, while still relevant, 12:44 is sort of not as relevant as the information age. And I think that process is basically going 12:49 to reveal a lot of things because now anybody with the LLMs can go and find out information. 12:56 And whether it's true information is really interesting. Are you a believer in the 13:01 Bitcoin sound money? When we have sound money, all of our political structures can get better 13:06 because we actually have something that is tied to truth in the sense of accounting, 13:11 like a good accounting system where money is valuable again. Do you buy into that? 13:17 I think it is an improvement. I don't think it's the end of the road at all. 13:24 I do think it's a huge problem. No one has any explanation for the fiscal trajectory of the 13:32 federal government in the United States or really in all these other governments. So 13:36 every federal government is just going to spend as much as they possibly can. 13:40 And the model is not, I think it's a mistake to look at it like a household where you earn a 13:46 certain amount and then you have a credit card or whatever. That is a mistake. The politicians 13:53 spend the money and then the recipients get the money. And who pays for it are taxpayers in the 13:59 future. It's a completely different group. And then even the bondholders, we go into debt, 14:04 the bondholders get a bond, they get the risk-free asset that no one will ever default on, 14:08 they get a yield. Who pays the bondholders? Future taxpayers, people who might not even 14:13 be able to vote yet. And so that is not the right model. Milton Friedman had a great 14:20 thought experiment where he said, imagine hypothetically there's like a magic 14:24 rich uncle or something who dies and he has whatever it is in the bank, $30 trillion, 14:30 and this is enough to pay down the national debt to zero and pay off everything and bring us back 14:36 to zero. His thought experiment is what would happen the next day? The politicians would spend 14:43 the full amount back. It would be like a graph down and then it would be like a little thing, 14:47 it would tap up and then it would go all the way back to the trend line down. It would go all the 14:52 way back. They would spend the $30 trillion on some excuse. And so the model is not a household. 14:59 The model is pushing the envelope and saying, we can get money out of this system until something 15:05 breaks. And it's going to break in a horrible way. Whether you had Bitcoin or not, it will break. 15:16 But if you had Bitcoin, it would probably break earlier because they'd need to actually come up 15:20 with Bitcoin to actually pay. You can't just keep going into debt and then have the Fed 15:25 service the debt with inflation. If there were laws, if this is the thing about crypto that's 15:29 so interesting, because if there were laws that tied Bitcoin to the treasury, if the treasury 15:34 had to account... I think the ideal Bitcoin scenario is that all the federal workers, 15:40 like people who work in the army and the post office or whatever, they would be paid because 15:45 Bitcoin has taken over. So now they know and in theory, they're running a full note or they have 15:50 a wallet that access full note, because that's what everyone does in theory. And so now the 15:56 federal government needs to obtain, in order to pay them, it needs to tax. Interesting. 16:02 And it can maybe pay them with IOUs and say, I'll pay you next year. But then those IOUs are 16:07 bonds and they can have, people could trade those. You know what I mean? So someone could say, 16:11 listen, I know that the federal government's saying I'm going to get $60,000 next year, 16:16 but I don't believe them. I'll sell you this 60,000 years, $60,000 payable to the bearer 16:21 or 6,000 BTC or whatever. And I'll sell you it for 30,000 or for 40,000. So there's immediately 16:27 a bond price and there's immediately market feedback for going into debt too much. 16:34 So really interesting points. Are you worried at all about the derivatives, 16:40 the fact that there are now treasury companies who entire stock strategy is to buy a bunch of 16:47 Bitcoin and then have their stock be worth more because the expected increase in value? 16:52 I agree with this and I don't know. But the thing is, 16:56 I hated Snapchat when it comes to this. Just because I hate something doesn't mean it's not 17:00 good. We need the world, Silicon Valley, we need the optimists to get their say. But yeah, 17:07 I don't get this idea at all. So I have background in economics and in business and other things. 17:12 And so to me, it makes absolutely no sense whatsoever. I mean, the whole point of the 17:15 company is the company is supposed to have some kind of comparative advantage. 17:18 It has to take these inputs and turn them into outputs that are worth reliably much more to 17:23 cover all the overhead and to give the investors a return on the capital employed for the business. 17:29 This is all like business school 101, finance 101 stuff. It's also finance 101 or maybe 102 17:37 or something. But you should not invest in a company that is going to buy Google stock or 17:43 something. You should just buy the Google stock. This is nothing against Google specifically. I'm 17:49 just saying you don't need an intermediary. You don't need a pointless middleman. Middlemen are 17:55 very good and middlemen make the world go round. But you don't want any pointless middleman, 18:00 really. Why am I buying Google? In other words, you don't want to buy a company that says, 18:03 we will buy copper. We will buy wheat. Just buy the wheat. What are they doing? 18:12 And in this case, I think it's very disturbing because the companies could get hacked. There 18:17 could be a regulatory change. They could just be an inside job and someone could steal the Bitcoin 18:22 and say, we got hacked. And then this thing with the MNAV, this idea of the NAV. The NAV is 18:28 something like the company has a million dollars worth of Bitcoin. It's currently worth a million. 18:34 But then that would be the NAV equal to one. But like for many of these companies, the 18:41 stock, the company is worth somehow is trading at higher than the, so the company is trading at 18:48 2 million. It doesn't do anything, but it has $1 million worth of Bitcoin. But why wouldn't 18:53 the whole company be worth 1 million? So wouldn't you short the company and buy Bitcoin? And this 18:58 is exactly what people have pointed out. And this is what a couple of people did. You can go back 19:02 and read. I even tweeted about it. There was someone who had been long Bitcoin in the real 19:09 spot market, and then they shorted MicroStrategy. I can only assume that trade must have done well, 19:16 because that was like a few months ago. And even though Bitcoin has gone down a little, 19:21 I think MicroStrategy has gone down more. I'm not sure. Check, always check the math, 19:25 you know, for yourself. But there was a guy who famously said that he would do this. And he said, 19:30 this has nothing to do with Bitcoin. He says, I'm actually going long Bitcoin in the trade. 19:34 This is basic financial engineering also. This is, again, maybe not finance 101, 19:38 but this is certainly derivatives 101, if you ever took such a class as I have. 19:44 This is like we combine several different things to get whatever you want. So like an example would 19:49 be you're in an airplane and you hear someone from Boeing, and then they go to the bathroom 19:53 and take a phone call. And you can't tell what the call is about, but you know that 19:57 they really worked up about something. Well, you could buy like call options out of the money and 20:04 put options so that the stock moves a lot in either direction, you make money. So all this stuff is... 20:14 So again, and there's even more to it than that. The treasury companies, 20:18 like if you just buy Bitcoin yourself, you are kind of in the situation where 20:24 no one knows that you own the coin. I mean, it does depend on your own government situation, 20:31 your tax jurisdiction you're in, and what kind of other information you have and how you bought 20:36 the coins. But there's a sense in which like... So for example, if you pay down debt, it's like 20:43 a tax-free, risk-free reward. So if you're in debt and you have credit card debt and it's 10%, 20:49 you're getting charged on the debt. If you pay that down, it's like you got an immediate tax-free, 20:55 risk-free 10% return. If you get an actual return in the real stock market, you have to sell, 21:01 you have to realize the gain, you have to pay capital gains tax, you have to report all this. 21:06 It's uncertain that you will... You don't know that you're going to get the 10%. 21:10 So if you buy the Bitcoin yourself, it's kind of like you have a tax-free... The upside is sort of 21:17 tax-free because it's in cyberspace and it kind of depends. And you can strategically 21:25 manage the tax consequences of that purchase. Whereas if you buy it in the corporation world, 21:32 there's like now tons and tons and tons of maybe fees, taxes, who knows. 21:38 And you don't know how that... So I don't understand at all why the Bitcoin treasury 21:44 companies exist. But who knows? I want to go into the technical details of what you're doing 21:53 specifically with ZK Proofs because that stuff is interesting. It's not totally in my wheelhouse yet 21:57 and I want it to be. But before we go there, I want to talk about what about a normal company 22:02 like Tesla buying Bitcoin as a treasury, as their financial hedge against their currencies and stuff 22:09 like that. Do you think that makes sense? Any thoughts there? I do. I think it could make sense. 22:13 It does cut against what I said before where I said you shouldn't buy... What Tesla should always 22:19 do is what their owners kind of want them to do. And so you shouldn't invest in Tesla if they're 22:23 just going to buy Bitcoin. However, there could be a good reason, which is like if you're worried 22:29 about having legal trouble and being sued and having some random judge somewhere tie up all 22:35 of the assets of the company in cash. If you're worried about that, now you've got some Bitcoin. 22:40 So now they can't. And now you can hire lawyers and you can have the appeals process go on and on 22:46 forever. And so you may need it as a kind of like... It's kind of like having a backup generator 22:53 at your house. And so in that way, it might actually serve a legitimate business purpose. 22:59 And I think that it could make sense. That's really cool. The other thought that I have for 23:04 the treasury... Not the treasury companies, the normal companies who have products and services 23:08 that they order, that they provide outside of that, is that it's essentially like any company 23:14 at a certain size turns into a finance company. So if they have cash like Google or all these 23:21 other companies, they maintain large cash balances in order to have cash, not like what you said, 23:27 but to go and buy acquisition if they need to or prepare for the future. And so there's... 23:34 Cash, although many companies do, which is interesting, such as Apple. But there's also 23:40 the idea of the commercial paper market or even other money market type things where 23:48 a company like Walmart may have no cash. This is a hypothetical example, but they may have no... 23:54 But then they need to make payroll. They could borrow money for like 23:57 two or three days, a very short term loan. So you're right that the CFOs of these companies 24:03 will do financial magic to get away with whatever cash balance they choose is something that they 24:10 think will make them the most money. So some people have a lot of cash, others have less. 24:14 I think with Apple, I may be totally wrong about this and this information may be outdated, 24:19 but I think they have like tons of cash overseas and they don't want to bring it back because it 24:24 will pay taxes. So whatever the situation is, they will manage it in a way to... 24:30 I think Apple is waiting for like a... They're just going to buy their time 24:34 and wait for the right government to be elected to give them like a one-time 24:38 exemption to move the money back. I heard something like that. 24:40 Oh, interesting. I just recently heard about something. It's in relation to Uruguay, 24:47 but Uruguay is only reacting to an international thing that I believe is probably coming from the 24:51 U.S. which is the U.S. is trying to get rid of the loopholes which I believe exist in Ireland. 24:56 And what you just mentioned is just like all these different places, 25:00 like the whole international system is totally crazy. 25:02 And so there's the U.S. government and the international order are attempting to maintain a 15% corporate tax on all of the different companies in the world, which is so crazy given what we're talking about, the TV dying and social media, it all seems like everything is going to get decentralized, including human attention. And it feels like all these sort of... It really feels at the moment like the, in my personal opinion, that the forces of nature are trying to get rid of the loopholes. 25:29 The forces of tyranny are winning. I actually think that they're losing. But it's like when somebody starts to lose control, they get really crazy and they start to do crazy things. 25:41 If you want to talk about it, we can definitely talk about that. Or we can move into the technical like ZK proofs. So if you wanted to respond to that, the last thing I said, we can do that. 25:53 I think there was a famous book, The Sovereign Individual, is that what it was called? I think. And it was about like how the internet is going to change everyone's relationship with their government and flip it around so that previously you're a hostage and you can be farmed up for cash. 26:14 But in the future, which is now the present, I suppose, you would be able to just change countries on a whim and move your money on a whim. And so then they would have to compete to retain it, be more like businesses. And the countries would have to say, come here, we will offer you such and such. 26:31 We'll offer you zero percent tax. We'll offer you these laws. And they thought that that would be a good idea. And I think I agree basically with what the book had to say. 26:42 I think there's some nuance to it. I got to go back and read that book because I've now heard it cited so many times. The thing about the United States, though, is I think the large empires or former empires like China and Russia are going to clamp down on their borders. 27:00 But maybe Russia wants people to move there probably because they now lack a lot of people. So it might just be the United States. But I definitely noticed that the United States seems to getting their border much stronger. And I guess they're trying to attract with the $5 million visa program. But yeah, it's an interesting question. 27:22 It's a prediction of the book, The Sovereign Individual. It says there will be various excuses to close the borders and keep the high value taxpayers in. And they even say – they say there will be like a pandemic fearmongering and they say all this stuff, fearmongering about immigration. 27:38 It's a very long book but it does predict a lot of things. I'm not saying that that was what happened. But it does speak to a certain number of things are tilted in the direction of maintaining the old relationship between the taxpayer and the government. 27:54 And they'll want to lean on anything that is – that touches that legitimate or fake. They'll just say, well, this is wishful thinking. They want a pandemic where we have to close all the airports and no one can get out. I think Russia is in a demographic collapse and they – I'm not sure anything can fix. 28:14 They'll need lots of people to come in. Who's going to go in when you're conscripting people and sending them in wars and things? I don't know. Who's going to want to go over there? That's the issue with – of course, the dictatorship has many advantages but it just has a few crucial disadvantages which is just like people just take one look at that and they just think, well, it seems like a risk to me so I just won't go there. And that ends up being worth a lot I think. 28:40 So crazy. It's such an interesting time to be alive. 29:10 So you can see the keys in Bitcoin and you can see the amount transferred in Bitcoin. And then so you've got a zero-knowledge proof and the zero-knowledge proof allows the same thing but it allows – or no, sorry. It allows – yeah, well, actually it was probably a good time to hand it over to you. What does the ZK proof allow two people to do? 29:31 Well, in Zcash, first of all, everyone can reuse the same address because as I've said, the transactions don't – they don't peg – each transaction is not pegged to any address. 29:43 So you just have one address. It's very long but it says whatever and then you can just post it publicly and show all your friends. They can then send money to you but no one will know that the money is coming to you or from them because you can reuse the same address because the addresses are not connected to the transactions. So that is a big difference. 30:02 How does the transaction – how does the money get – or has value transact? 30:08 Well, okay. I'm not – first of all, I'm not an expert on the actual ZK proof technology and it's very arcane but I can explain a little bit about the type of way that it works. It might work. 30:22 So there is an idea of – so the SNARK or the NA, like – well, let me give you an example of like how it would be – so like there's one classic example where you're on – there's like a cave that has like a circle and you want to get out and someone like a monster or something follows you into there and you've got to go left or right. 30:47 If you go left and they meet you, then they'll eat you or something. But if you go the other way, then you get out. 30:57 And so the question is if you tested the person a million times and they got out every time, then that would show that they know which way the monster is heading. 31:09 The monster is headed left or right and you know – you evade them every time or what have you. 31:15 I probably butchered that but that's like a classic example. 31:18 So that's sort of interactive in the sense of you have tested them over and over again and you see they pass every time. 31:25 So I don't know how and they – most critically, this is the zero knowledge part, which is it's not justified. 31:32 I'm not telling you how I get out of the cave every time. 31:35 I'm not telling you how. 31:38 But we all know that I can. 31:41 So somehow I'm doing it. 31:43 Interesting. OK. 31:44 So that's a way of making the argument that I know something without anyone really kind of explaining. 31:51 It's just to have this repeated test. 31:54 So that may shed some light on it. 31:57 This has been described as moon math before and even when – what was that guy's name? 32:06 Zuko Wilcox, the creator of Zcatch. 32:10 He first would give talks about this and he would say I have absolutely no idea how any of this works. 32:14 He had like math on the slides and he'd say no one knows how this works. 32:17 This was like in 2015 or something. 32:19 So I'm hesitant to try to explain how to render it. 32:22 But the thing is there's a – because – partially because of Zcatch, there is a large – and because of Ethereum. 32:30 There's a large research community around this and they have built software libraries and we have just taken the Zcatch one piece. 32:37 There's a huge stack, but they have like a Zk-SNARK library now. 32:43 And that's just open source online. 32:46 So it is not – I don't know how fruitful it would be to try to explain. 32:53 But we could continue to try or we could – 32:57 No, no, no. 32:59 I've got a specific question because I only asked that question because I wasn't familiar with it. 33:02 And that actually answered a lot of questions. 33:05 Why it's been so hard for me to figure out Zk-proofs is because there's moon math involved and I'm going to definitely steal that terminology. 33:13 So what was that tiny piece that you got from all the Zk-proofs and attached to Bitcoin? 33:20 What's the relationship to Bitcoin? 33:22 Well, OK, that's a different question. 33:25 But they have – Zcatch has produced different like phases and they named them after plants. 33:33 Like one was like sapling and one was like sprout. 33:37 One was like orchard. 33:39 So there's like the latest version. 33:41 Now to have the Zcatch altcoin function, they actually need this kind of like turnstile thing where the money will leave the old zone and go into the new zone. 33:51 And they made numerous improvements over the years. 33:55 So for example, on the old Zcatch, you could not run the software on a phone. 34:01 It was too resource intensive. 34:04 Wow. 34:05 And also you had to have a trusted setup with a few people. 34:08 So if they all colluded, they could break the privacy. 34:15 But you needed everyone to collude. 34:17 So as long as one person like destroys – this was called a toxic – I think it was called toxic waste or something like that was the nickname for it. 34:26 Everyone had to like do this thing. 34:28 Like a group of people did this and they had to delete what they had on their computer. 34:35 As long as at least one person did that, it would work. 34:38 Now this was then upgraded to like something like 80 people. 34:40 And then they have a new version. 34:42 This is this thing called Halo 2, which did not require the trusted setup or at least did something that was like so feasible that it's no longer a relevant issue. 34:53 So this is all in their orchard crate. 34:56 They have like a rust crate. 34:58 I'm not sure how familiar you are with rust crates. 35:00 But rust puts everything in these crates. 35:02 And so they have a rust crate for that. 35:03 Is that like a – what is it when you go – oh man, how could I forget? 35:14 Docker. Is it like a Docker container for rust? 35:16 Well, a little bit. 35:18 Of course, it is kind of like a dependency in a way. 35:21 And just merely the crate is not enough because it's not enough to have – that doesn't equal like a wallet or a node or whatever. 35:28 But this is like the crypto library that does the moon math. 35:31 So it's like moon math in and out. 35:33 So I took that part. 35:35 Connecting things to Bitcoin is a different matter, which is my other area, which is the sidechain or the Drivechain. 35:41 It was Bitcoin 300. 35:43 It's something I've been into for a long time about what is the right way if you don't like what Bitcoin Core is doing. 35:48 If you think the block time should be faster or the block size should be bigger or that there should be smart contracts or something else. 35:54 How do you have like a competing piece of software where you have real Bitcoin on there and in a way that actually works? 36:04 Where you have this infinite freedom, the open source kind of freedom, but you also are not weighing everyone else down on Bitcoin Core with all of your weird ideas, which may be terrible ideas. 36:16 So that was an old concept that I became obsessed with in 2015. 36:22 And that is what became the Drivechain idea. 36:25 What is sometimes today called the sidechain, although that word has also been abused. 36:30 And now I think that word has basically no meaning. 36:33 So it's a Drivechain. 36:35 A Drivechain is what you're calling it. 36:38 At LayerTwo Labs, we have like a few of these type of things. 36:42 And that's really interesting. 36:43 I haven't picked this up since, when was that? 36:46 It was in 2018 when there was a block size war. 36:49 When was the block size war? 36:51 Well, I would say it kind of ended around 2017, although arguably continued for another year as Bitcoin Cash. 36:57 August 1st was the launch of Bitcoin Cash and then November of 2017 was the abandonment of SegWit2x, which caused the split. 37:08 And then you could arguably say that they kind of still fought it out for another year. 37:13 Got it. 37:15 But Bitcoin Cash never really overtook BTC in terms of recognizability, adoption, whatever. 37:27 So that would be – that's the short version is that that was the finally being ousted and going into like altcoin kind of status. 37:36 Really, the block size war raged from maybe at least – I mean, definitely in 2015, it got very big with Mike Hearn and Bitcoin XT and the scaling Bitcoin conferences. 37:49 It's kind of always in the background a little bit. 37:52 Well, let's talk about that because you're essentially – you want to create a Drivechain. 37:57 And this Drivechain will allow people to essentially transact with privacy off of Bitcoin, which is really interesting. 38:06 Can you talk more about that, how the privacy will work? 38:10 I have one, this Zcash related L2. 38:14 It's sometimes called Zside. 38:16 Zside, OK, cool. 38:18 It's a sidechain. 38:20 But then I have a separate one called – you can just keep doing this all day. 38:23 And I have a separate one that I call Thunder as a kind of lightning joke. 38:27 And that one, if you had – I have like a plan to have like 14 geographically distributed. 38:35 So you have like one for like North America, one for like Western Europe, one for like Southeast Asia. 38:41 And if you had like 14 of these, you could have – with the software we currently have, it would be able to process every transaction on earth. 38:48 And I recently had like a contest to improve the performance and try – test 960 megabyte blocks and see how to improve the performance, which was – I think it was a big success. 39:03 And anyone can go online now and look at the – we had like the benchmark script used to test the software and it will generate – it takes like an hour. 39:12 But it will generate a huge number of transactions as if it will like kind of load this huge buffer of transactions as if there were trillions of transactions per year, roughly 9 trillion transactions per year at a certain rate. 39:27 And then it will connect like 10 blocks of that and it will time with the stopwatch and you can see how long that takes. 39:34 And it does – it takes – it's reasonably fast. 39:37 It's only a few minutes or so. 39:39 So actually it's – and it's 10-minute blocks. 39:43 So as long as it's less than 10 minutes, then you're in business. 39:46 And this is like on normal – pretty normal hardware. 39:50 This is just on like the GitHub runner thing. 39:53 So that's my plan to scale Bitcoin. 39:56 And we again are testing it at planetary scale right now, which is something that I really don't think anyone has done or even would even dream of trying to do. 40:05 With Lightning, they realize – at least by now on a subconscious level, they realize that you can't onboard people to Lightning without an L1 transaction. 40:15 So it's a complete dead end for scaling. 40:18 But everyone is just dancing around this. 40:20 So I got to go into that one because that – somebody tried to send me a Lightning thing and it did not work. 40:29 And it sounds – it seems like it's dead. 40:31 It's custodial. 40:33 It doesn't use Bitcoin network or the Lightning network. 40:35 It's just an – it's like an app that updates. 40:37 You have a third party. 40:39 On their app and it's all fake. 40:41 And that's all travesty. 40:43 So can you go into that specific thing that you mentioned? 40:46 I mean there's a bunch of things I want to go back to. 40:48 One is the 960 megabyte block. 40:50 But before we go into that, I want to go into Lightning, which is why is – why is Lightning failing basically? 40:58 Well, it's like a good attempt. 41:02 But part – it has just fundamentally is incapable of doing the job. 41:07 So Lightning was this idea that was just like six degrees of separation like Kevin Bacon type idea where if you want to pay someone, maybe you don't know them personally. 41:18 But you probably know someone who knows someone that they know or something. 41:21 You build this route. 41:22 So the idea is we'd already have all these channels open with people and that we could reuse on L2 with the channels we would send – not on L1. 41:32 And on L2, we would be able to have a path and we would be able to send them. 41:36 So the problem is opening a channel requires one L1 transaction. 41:40 And so there's not enough space for that even. 41:42 Even in a hypothetical world where we all only need one transaction ever in our lives on Bitcoin L1, there's not enough space. 41:50 It would take like something like six or seven years to onboard everyone, which is too long. 41:56 But the bigger issue – 41:58 So the block size? 42:00 Yeah, the channels don't last that long. 42:02 You have to refresh them because of liquidity issues and of course people need more than one channel. 42:06 And in fact, when Lightning works now, it often uses this thing called the submarine swap, which again, these are all fancy terms for just saying that Lightning is broken but without admitting that out loud. 42:15 So the submarine swap is a one L1 transaction made by one of the two parties to reset the liquidity. 42:23 So it's like you use Lightning but they use one L1 transaction is required each time. 42:28 So the Lightning part is kind of superfluous. 42:30 So the block size war was lost basically. 42:34 That's what you're trying to say. 42:36 I actually was a small blocker and I still am and I'm in favor of shrinking block size because we can have the L2 that has the unlimited block size. 42:42 So I always thought it doesn't matter what the L1 block size can be very small. 42:46 But the issue is that the L1 – well, the block size war led to a situation where the large blockers said we need to increase the block size. 42:57 They lost and this discredited them and it discredited anything related to like block size or blockchain design. 43:06 And it discredited – also the miners took their side so it discredited anything related to like mining or collecting L1 transaction fees. 43:12 So this was like a 10-year setback I think. 43:15 And then meanwhile the people who won, their answer to what are we going to do because the block size does not scale Bitcoin. 43:23 The L1 blocks are too small. 43:25 So what do we do? 43:27 Their answer was we'll scale in layers and specifically we'll scale with the Lightning network. 43:31 So this led everyone to put all of their attention on Lightning which has been a huge – Lightning is basically the Theranos of Bitcoin unfortunately. 43:39 But it has distracted everyone and it has pulled everyone away from what they should have been doing the whole time. 43:45 But now people are realizing that. 43:47 But now there's been like two 10-year setbacks. 43:50 Now people are starting to come back. 43:54 It's so interesting. 43:56 Only a few people too. 43:58 But this started this like Bitcoin Season 2 and like the push for Covenants and like ARK and stuff like that. 44:03 These are people – again, this is all just a way of admitting that Lightning doesn't work without saying that out loud. 44:10 You get invited to the right parties. 44:13 It's very common. 44:15 And Bitcoin is a bit of a religion. 44:17 I'm just a supporter of that religion. 44:19 So it is very common. 44:21 And they call it Covenant 2 which is really funny. 44:23 Yeah, it's kind of pretentious and like aloof weird term that is not very accessible. 44:29 It's not just like where are the Anglo-Saxon words? 44:32 Like backhoe or whatever, wifebeater. 44:36 Where are the clear words that just say what you mean? 44:39 They're nowhere to be found. 44:41 But this is the problem with Lightning also is that it's very technical. 44:45 You can get the VCs. 44:47 If you pronounce the right words, the VCs have no idea what's going on. 44:51 So they will just invest. 44:53 And so that's why it is – unfortunately, yeah. 44:56 That's part of why it's a setback because it's self-reinforcing. 44:59 Yeah, no. 45:01 It's so strange and it's absurd and it's funny like a lot of things are now. 45:06 But you're optimistic because you're building this thing that is going to change. 45:12 It's quite hard to be pessimistic when first of all, Bitcoin has done like 100,000x ROI. 45:19 So Bitcoin has succeeded enormously. 45:22 Everyone hated it. 45:24 All the years I've known about Bitcoin, everyone was hating it. 45:26 It was awkward to talk about. 45:28 You couldn't even talk about it with like your friends and family because it was just so stigmatizing. 45:33 And you seemed like you were getting scammed the whole time. 45:36 But yet it prevailed and crushed everyone. 45:38 It became a voting block issue. 45:41 It made everyone wealthy and powerful and interesting. 45:46 And the other thing is I had the Drivechain idea back in 2015. 45:50 So the whole time I've known that it's possible to make Bitcoin scale to the whole planet. 45:56 And it's possible to have Bitcoin transactions that do the same smart contracts at the same EVM as Ethereum. 46:03 And it's the same privacy as Zcash. 46:05 So I always knew that that was possible in theory. 46:07 Because of the block size. 46:09 And then eventually like in late 2022, I started this company because I just was tired of waiting for this to happen. 46:16 So I was like, I'll just have to do it myself. 46:17 It's still a lot of what I have to say is misunderstood by a lot of people. 46:22 So but what is the – because you said you were a small block size. 46:28 What is the – 46:30 Right, I'm on L1. 46:32 But then 960 is L2. 46:34 So this ignores the night and day difference between L1 and L2, which is the all-important night and day difference. 46:38 The L2s are optional. 46:40 If they fail for any reason, if they get attacked, if they have a bug and they crash, 46:45 if the government says running the L2 software will get you shot in the head and killed, it doesn't matter. 46:51 That can just fail or it can just even be on pause. 46:54 It can just be – we can just bide our time. 46:56 It's like the Mott and Bailey type thing. 46:58 If that fails for any reason, it doesn't make any difference. 47:01 The L1, if the L1 is mandatory for everyone to run in order for the miners to get paid, in order for the blocks to flow, in order for proof of work to happen, the L1 is mandatory for everyone. 47:10 And really if you think about it, the way I have structured it, it's like the L1 is mandatory and then if you want to run the L2, you need the L1 plus the L2. 47:20 So every L2 node needs the L1 node, but the reverse is not the case. 47:24 So what we're saying is it's kind of like a la carte. 47:27 How much do you want everyone to have to pay in terms of the cost of running the full nodes? 47:34 So does that make sense? 47:35 So you can see why at first you want the first pass to be as low as possible because you don't want to exclude anyone from the first zone. 47:43 Then when you want to staple more stuff on, you can grow it to whatever you think is the right size. 47:50 And then maybe there will only be a few nodes, but it won't matter because you're pushing the envelope. 47:56 This is explicitly we've switched from something that everyone must do. 48:00 It's kind of like a pacemaker. 48:02 You don't want it to be very adventurous. 48:04 You want it to be very simple. 48:06 You want it to be very reliable. 48:08 You don't want the pacemaker to have Bluetooth or something, right? 48:12 But the L2s are a completely different thing. 48:16 They're optional. 48:18 So now we have them of all shapes and sizes. 48:20 So we have the Zcache one, we have Thunder, we have a few more. 48:24 Oh, got it. 48:26 So you're making multiple L2s because you're just thinking about it from an adoption standpoint. 48:31 If it gets adopted. 48:37 An L2, let me explain what I think an L2 is. 48:41 And then you can help me figure it out. 48:43 An L2 is basically something. 48:46 So you got an L1 that is computing blocks. 48:50 The miners use their computation power to basically do a cryptographic puzzle. 48:56 And then they get rewarded with that cryptographic puzzle. 48:58 And that's to mine one Bitcoin block. 49:02 The L2, what is the relationship between that and the L1? 49:08 The L2 and the L1 in that scenario? 49:10 Well, I think we have to sort nodes from miners. 49:14 The nodes are doing the CPU work of assembling the transactions into a block. 49:22 And checking each block, storing each block on your computer. 49:25 So this is the so-called data availability problem. 49:29 So the blockchain is stored by the nodes. 49:32 And the miners, it's actually the miners are their own kind of similar to the L2, L1 relationship. 49:39 You need to run a node in order to mine or you need to talk to one. 49:43 You need to have someone, someone out there has to give you information if you're a miner. 49:47 The miner is like a customer of the node. 49:50 It's a little bit backwards than the way a lot of people think about it. 49:52 So if you're mining, you either need a node yourself or you need someone's node somewhere. 49:59 You need to let them borrow it. 50:01 Got it, got it. 50:03 Everyone who gets paid. 50:03 If you run a store and you accept Bitcoin, or if you're a laborer, and your boss pays you in Bitcoin, the node is what tells you whether or not you have been paid. There are various hacks and, and cheats and things. But that's really the purpose of the node. This is another thing that very, very few people understand. This is the part of the whole knots versus core controversy is based on misunderstanding this as well, which is what's the point of the node. The point of the node is to validate incoming transactions. 50:30 So if you, if you aren't, if you don't own a store and you're selling stuff for Bitcoin, or you're not a, you don't own like a graphic design consultancy, and you're being paid in Bitcoin, then the node isn't doing that much for you. 50:44 You could maybe say it's archiving the blockchain. But we don't really need that as much as people think so. Whereas if you're something like Coinbase, or you're Kraken or whatever, people are sending you Bitcoin all the time. 50:58 So their node is really important. Not only do they run one node, but they run multiple old, they're probably running Bitcoin 0.12 and 13 and 14. They run them all. And if anything weird happens, they have like a giant button that they press that probably halts the whole, this is how I assume it works. 51:16 But I've talked to people in the industry. And I know that it does work or something like that. So those people are critically relying on the nodes. And then other people just kind of think, well, I'm running my node to this, they think this is like some kind of American Idol text to you want to win situation, which it is not. But that's fine. Also that people are, I'm glad I'm happy that people are excited about something or whatever. 51:40 So the node, to review what I was talking about, the miners need a node, in part because the miners are getting paid by their pool or they find a block and the block is going to pay them three Bitcoin or it used to be 50 Bitcoin. So obviously in the past, if you were mining, you wanted the node because you wanted to see if you hit the block or not, which is the only real way to know. 51:59 So these are all people have money coming in. And so the nodes do this part. The miners are just grinding SHA-256. They grind this SHA-256d, double SHA-256. And they try to get the hash of the blocks header to be very, very low. 52:16 Because the hash is a giant integer. And so they say it has to start with a certain number of leading zeros. That's like a computer science term, because what they're thinking of is the memory of the computer, which is ones and zeros. So they're thinking of those zeros, they're thinking 0, 0, 0, 0, 0. But a regular person would just say each block header, basically, the hash is basically a number. It's a huge number. 52:39 But it's a number chosen between 0 and like 2 to the 256. Which is basically, I think I used to be able to do this a little bit better. But I think it's something like 16 to the 64th. Is that right? It's 2 to the 256. You can change it around, maybe off by one or two. But that 10 to the 80th is the number of atoms in the universe. 53:02 So if you see 1664, of course, it's not, but I'm just saying like, this is like the biggest number. You know, it's like really, really big. So you're picking a big number and the difficulty adjustment is saying it's only valid if it is in a very narrow set. 53:20 So if the first bit starts, you think about the first bit is 0 or 1. If you say we only want the numbers in the first half, we're going 0 to 2 to the 256, the max. If you say you've got to make it halfway, at least, that's like saying we'll give up half the hashes and the number has to start with at least one zero. 53:43 There's this thing called Indianness, but I don't want to confuse. 53:46 Indianness? 53:48 You have this huge timeline or this huge space, and half of them are in the top half. That's the first zero. And then 25% of them start with two zeros in a way. 54:00 So when people say this about solving the puzzle, and must start with a certain number of zeros, they mean the more and more zeros eventually in the top eighth, top 164th, and in fact, we've really crunched it way down, where it's a tiny, tiny, tiny percentage, because there's 256 numbers that could either be 0 or 1. 54:19 And so for you to even get to something like 16, or I mean, I think 2 to the 10th is like 1024 or something, so you're already throwing away 99.9% of the blocks, even when you're just starting with 10 zeros. 54:37 But now at this point, we're starting with huge amounts. 54:40 So that's what the miners do. I don't know if that was too weird. 54:44 No, no, no. This is all interesting, because the way I learn is I get an abstract concept, and then that abstract concept, the more I go into it, the more I realize that it doesn't accurately reflect reality. 54:57 And so that number that you were describing, that really long number, I got that that's the puzzle. 55:03 That is the hash effect. 55:05 So when you go on a block explorer and you click on a block, that's what that is. 55:10 You can go on right now and look, and you'll see not only does it start with zeros in the sense of the bits in the computer's memory, but when you have eight of those in a row, it ends up being a zero when they put it in hex anyway. 55:24 So you'll see it actually, the real one has lots of real zeros that it starts with also, because it just has so many zeros. 55:33 And the miners are competing. 55:34 I may have a double or triple check. It depends on how, because people do the hex, they do two hex characters, and that's 256. So it's actually two zeros, but I don't want to like, this is not the type of thing you should just say glibly on a podcast. 55:47 Everyone can look up like exact details of it all, but what I'm saying is the, when you look at the block, it will print it out in hex, it will not print it out in binary, like a big string of ones and zeros. 55:58 Got it. 56:00 That's why I remember that joke from Silicon Valley, the show, and like the first episode where he does his multiplication tables in hex, he says like five times F. 56:11 And he says it's like it's 75 or something, he just makes the, he just made that up, but the point is, there's, hex is like counting to 16 and if you count to 16 twice you get to 256, and so two zeros and I don't know, this is probably boring people at this point. 56:27 The joke, look up the joke of what's, I think it's what's five times F is the joke. 56:31 So. 56:32 He just made that up, Ehrlich Bachman, the cowboy actor. 56:35 So. 56:36 But it's funny anyway. 56:37 So what are the miners competing to do in that thing that you just said? 56:43 They are, what they do is they have a, the block is changing all the time, first of all, because new transactions are coming in. 56:49 Yeah. 56:50 The transactions change the Merkle tree. 56:51 Yeah. 56:52 Okay, Merkle tree, I got to go study that. 56:55 I'm sorry. 56:56 No, no, I was just saying I got to, can you hear me now? 57:00 Yes. 57:01 Yeah, I was just saying I got to study the Merkle tree. 57:03 So can you go back to that part where. 57:04 Your audio did like something weird, I think maybe like hit the microphone or something. 57:08 So it just sounded weird to me for a second. 57:10 Okay. 57:11 So the one thing is that what is a Bitcoin block? 57:14 And it's actually made of this thing called the header, which is only 80 bytes, which is very small, which is extremely small. 57:22 It's the header plus the vector of transactions. 57:25 So it's very important to separate these two things to have a proper understanding of what the miner does. 57:33 And so the vector of transactions is hashed to this Merkle tree, which the result is just this tiny little 32 byte thing, which is 64 characters long. 57:45 And this goes into the header. 57:48 The header only contains a very small number of things, four bytes for the version, the hash of the previous block, the hash of the Merkle root. 57:57 And you can see how this is laying it out in space. 58:00 So like you have header, header, header, block 1, 2, 3, 4, 5. 58:03 Then beneath the block, theoretically, you have like the vector of transactions and you have like the Merkle tree, which is like a triangle. 58:10 And so it's a version, previous block, hash Merkle roots, the timestamp, and this thing called the nonce. 58:21 And these are the only things in the header. 58:24 And every time a single byte or even a single bit of the header changes, the hash of the block will change. 58:34 And that's the thing that has to be beneath the zeros. 58:37 So I don't know. Maybe this will help. 58:39 But you can imagine a bunch of hashes. 58:42 You know, like what a hash is when I'm talking about a 32 byte hash. 58:46 Imagine hash of block 1, 2, 3, 4, 5 just arrayed in a big line. 58:50 Then beneath that, there's 32 byte hash. 58:53 Beneath that would be like a little box, 80 bytes. 58:57 And it contains all this stuff. 58:58 One of the things it contains is the hash of the previous block. 59:01 So it'll be, if you looked with your eyes diagonally, you would see the same little thing. 59:07 And then beneath each of those tiny little boxes, there's like a huge box that has like a huge list of all the transactions that were in that block. 59:16 So this is like a review 101. 59:19 I'm like, well, maybe it's not 101, but I'm just saying this is funny because this is older stuff. 59:27 If I could still remember it all, but I think I can. 59:30 And so the hash you want to be a very low number, low integer. 59:36 The miners will scramble the nonce. 59:40 They take the block and they increment the nonce. 59:43 Nonce is even named. 59:44 There's a number that is used only once, and that is the origin of its name. 59:48 In fact, so when they do that, it switches the hash to something else. 59:53 So they're kind of shuffling the deck each time to get a new card. 59:59 From like it maybe said like Ace of Spades is like the lowest or something and like whatever King of Diamonds is the highest. 1:00:06 I'm just making this up. 1:00:08 But if you named it one through 52, they're kind of shuffling the deck and drawing the card. 1:00:13 And if they don't hit, if they don't get close enough to the top, then it's not a valid block. 1:00:20 And so they're hoping to get very, very close, except instead of going from 0 to 52, it's 0 to 256. 1:00:29 That's enormous numbers. 1:00:31 It's a fathomably large deck that is absolutely gargantuan. 1:00:35 And that's what they do it millions of times. 1:00:36 Now, in practice, they don't have to increment the nonce so often, although they do, because the timestamp is also changing every second. 1:00:45 And the Merkle tree is also changing as new transactions show up in the mempool and are broadcast on the network. 1:00:50 So actually everything is changing. 1:00:52 All those things are changing. 1:00:53 And in fact, in the Coinbase, the miners scramble this thing called the extra nonce, and they do all kinds of other stuff, too. 1:00:58 They also scramble the version bytes. 1:01:00 They scramble everything to try to go as fast as possible. 1:01:05 But this is just a different – this is completely different from the node thing where they are using the CPU to basically make a trivial change to the block that has nothing to do with the transactions in it and then SHA-256 again. 1:01:23 So that is what all these ASICs and whatever are doing. 1:01:26 They are doing that. 1:01:28 They are doing a completely different thing, which is not really that complicated, but they have to do it as many times as they possibly can as quickly as possible and as cheaply as possible. 1:01:36 And so that's what they are doing. 1:01:38 That's what they're getting rewarded for? 1:01:40 If they hit – when they change the block, eventually – the hash will change every time, remember. 1:01:46 So eventually, not anytime soon, but if they try – think about it like this way. 1:01:52 If they try one hash a second, then the hash just sort of is what it is. 1:01:57 But if they try two hashes a second, if they can make the block, calculate the hash, then shift the block and calculate it again, probably one of those hashes will start with a 1 and the other will start with a 0. 1:02:10 Not necessarily really, but then imagine you can do four hashes at once. 1:02:15 They're all random. 1:02:17 The hashes are random and unpredictable. 1:02:20 So if you can do four at once, probably you've got one that starts with 1, 1, probably one that starts with 0, 1, probably one that starts with 1, 0, and then you probably have one that starts with 0, 0. 1:02:31 Now, of course, I'm just making this up. 1:02:33 This is not like totally to be relied upon. 1:02:37 But the point is if you do it more and more and more and more, eventually, you can guarantee that within the first second you'll have one that starts with five or six zeros. 1:02:47 But then the goal is to do it so many times that you eventually – before any of the other miners, you find one that has enough zeros to count. 1:02:56 So they're all trying to cheat, but it's a virtuous cycle. 1:03:00 Is that what I heard basically? 1:03:02 It's like a race. 1:03:03 It's like a 400-meter dash. 1:03:05 Okay. 1:03:06 So the faster you run, you're more likely to win. 1:03:08 That's not quite the same because it's not – the 400-meter dash is like a deterministic physics. 1:03:12 Yeah, interesting. 1:03:14 These things are – this is what's called memorylessness property in statistics. 1:03:21 So the hash does not know. 1:03:23 You can have two examples. 1:03:26 So imagine trying to crack a safe, and the safe has just a dial. 1:03:30 And if you get the dial right, the safe opens. 1:03:33 It is numbered one through 1,000. 1:03:35 You try one, and then it doesn't work. 1:03:38 You pull the lever. 1:03:39 You try number two. 1:03:40 It doesn't work. 1:03:41 Try number three. 1:03:42 On average, it should take you about 500 tries because 500 is where you've crossed the point of having tried half of the – you've tried one out of every two. 1:03:51 Got it. 1:03:52 On average, it should take you 500 tries. 1:03:54 That is not how Bitcoin mining works at all. 1:03:56 It works a different way. 1:03:58 You have to imagine that there's a long hallway with an infinite number of safes that are all identical. 1:04:05 They're all set to random values. 1:04:07 You don't know which they are. 1:04:08 And you go up, and you spin the dial randomly, and then you pull – it lands on 37 or something. 1:04:14 You pull the lever, and if that doesn't work, you walk to the next safe, and then you try again. 1:04:20 That is what Bitcoin mining is like. 1:04:22 So every single spin is the same. 1:04:26 But if you can run down and you can just pull as many levers as you can, spin all the dials, and pull the levers, you're likely to open – to finally hit and open one of the safes. 1:04:37 In this case, by the way, it should take you about 1,000 tries because you never make any – you don't make any progress. 1:04:43 So you're stuck at one out of 1,000 permanently. 1:04:47 So you can see after – and the other thing is when you spin the first – in the previous example where you only have one safe, the first try is one in 1,000. 1:04:58 But immediately, your odds start to improve. 1:05:01 And in fact, once you get to the 500th spin, it's more like one in 500. 1:05:06 By the time you get down to the last two numbers, it's a 50-50. 1:05:10 It's either going to be 9, 9, 8 or 9, 9, 9. 1:05:12 Maybe you don't know which one it is. 1:05:14 At some point, you might feel your luck is so bad, you might skip 9, 9, 8 and try 9, 9, 9. 1:05:18 You might feel like an idiot for starting at zero or starting at one. 1:05:22 But the point is now there's only two that it can be. 1:05:25 So it's actually down to 50-50 at that point. 1:05:28 And in fact, if you tried them all and there's only one left, then it's a 100% chance, of course, that that one will be the one that opens the safe. 1:05:36 This does not happen in the Bitcoin mining example, the memorylessness example where you're walking down the hallway. 1:05:42 No matter what, it's always a new thing. 1:05:45 Even if you just had five that were seven in a row, the next one could be seven or it could not. 1:05:51 You have no way of knowing. 1:05:52 So it's always one in 1,000. 1:05:55 Okay, so and then for the last five minutes or so, what is the – and you have an appointment afterwards, I think, as well. 1:06:01 And if you have to go, let me know. 1:06:03 But what is the – how do the L2s fit into that, what you just described? 1:06:11 That's important. 1:06:12 So we separate nodes and miners. 1:06:13 So we did like a long digression about miners. 1:06:15 But the nodes are what process every transaction and store every transaction and serve it back whenever you ask. 1:06:23 So when a new person wants to sync a node, it's kind of like BitTorrent where they download every season of Game of Thrones or something and someone is uploading. 1:06:31 So this part is crucial because if no one does – if no one mines, then maybe there won't be any block until someone starts mining again. 1:06:39 But if no one provides the blockchain data, then no one knows if anything is a double spend or not, or no one knows. 1:06:46 This is the whole point of Satoshi's design. 1:06:48 So no one can spend any money without the blockchain history. 1:06:50 No one knows who has the coins. 1:06:52 So for each – so the block size debate was kind of about this, which was like what are we – what's the rule? 1:07:00 Like how much are we all obligated? 1:07:02 It's like you're kind of doing – you and a bunch of friends are going to go on a trip. 1:07:05 Like is it going to be – are we going to like Tahiti or something? 1:07:08 Is it going to be – is it going to cost a fortune? 1:07:10 But in which case the trip might be better, but everyone is going to have to pay more money. 1:07:15 Or are we just going to go to the local bar, in which case it's much easier. 1:07:23 It's going to cost less, but it might not be as special. 1:07:26 So the block size is kind of like what are we all – it's a collective issue. 1:07:30 Like what are we all in for? 1:07:32 The L2s, as I've said, the way the L2s work is it's sort of saying all of us are agreed to go in for more stuff. 1:07:40 We're saying we're going to go to the bar and then some of us, a small subset of us are going to go to Tahiti 1:07:47 or we're going to go to Disney World or whatever. 1:07:49 Take your pick as to what a great vacation is. 1:07:52 But that's the point. 1:07:55 The question is – this makes it very easy to transact on L1 and send the coins from L1 to L2 and transact on L2. 1:08:05 But what it does not make easy is having the coins come back from L2 to L1. 1:08:09 The question is how do we do that? 1:08:11 That is the big sticking problem because remember some of the people are only on L1 1:08:16 and they have no idea what happened on L2 and they don't want to know. 1:08:21 Even if we force them to know, that would be bad because that's just forcing them to go to Tahiti and they didn't want to go. 1:08:26 So the question is what do we do about that? 1:08:30 What I do is I bundle all of the withdrawal – the entire activity on the L2 including the withdrawal transactions over a period of months. 1:08:40 The entirety of the outstanding activity, I bundle that into one transaction that has one hash. 1:08:47 And then I basically have the miners on L1 slowly, very slowly approve this hash. 1:08:53 This is deliberately extremely slow for security reasons. 1:08:56 It requires everyone to lie. 1:08:58 It's a little bit like the cave thing, the ZK in a way, where it requires that if you want to misstate anything that happened on the L2 ever, 1:09:10 the whole trajectory and the withdrawal period. 1:09:14 The hash will be different, and the miners will have to basically knowingly endorse hash A does not equal what it should. 1:09:22 It should be hash A equals hash A. It will equal something else that's completely different. 1:09:26 The point of that is to make it so that the miners are the ones who can basically slowly approve the withdrawal. 1:09:32 And the reason why this works is because of something else that was invented by Satoshi in 2010 called merge mining. 1:09:42 Where the L1 miners can collect fees from other blockchain networks for free. 1:09:47 So they get all this cash for free, and we're doing essentially zero additional work. 1:09:54 It's so little that it might as well be zero. 1:09:57 And this is more CPU work. 1:10:00 This is not any of the hash. 1:10:01 It's kind of like they open all the safes at once. 1:10:04 Not only is there a long row of safes. 1:10:08 So you may be familiar with a Namecoin, which was merge mined with Bitcoin ever since 2011. 1:10:12 And you may also be familiar with Dogecoin and Litecoin are merge mined. 1:10:19 What you actually do under the hood is you actually run Namecoin software, and you find a Namecoin block. 1:10:24 But the Namecoin block is built so that part of it is a Bitcoin block. 1:10:28 So you always find a Namecoin and a Bitcoin block at once. 1:10:31 And you can do this to an unlimited degree. 1:10:33 You can actually find blocks on all the L2s at once, like 5, 6, 7. 1:10:37 And so the logic of this system is this, which is that miners will make a ton of money from this system. 1:10:44 A huge, like an enormous amount of money in revenue from this in return for doing very little work. 1:10:49 So they would not want to kill the goose that lays the golden egg. 1:10:53 And that's why it would work. 1:10:55 Another leg of the logic behind why this is the way it is, is that even if it's very slow, the withdrawal coming back. 1:11:04 First of all, the deposits are instant. 1:11:06 But second of all, there's like a secondary market. 1:11:09 So you can imagine an example where there's like a casino, and the casino you can win. 1:11:14 Some people – the casino is like the L2. 1:11:16 And you can win and lose your money in different ways here at this casino. 1:11:22 But then when you want to cash the chips out, that's like the withdrawal from the L2 back to the L1. 1:11:27 And in my version, it's very, very, very slow and very secure. 1:11:32 And so you go to like the counter and you've got your chips, and it's going to take you maybe months to get the chips cashed out, which is like going back to L1. 1:11:40 However, the reason why this is not a problem is because a secondary market will develop where there's like a bunch of people in front of the exchange counter at the casino. 1:11:54 Like a bunch of people who are just like, listen, I will pay 99. 1:11:57 I'll give you today. 1:11:59 Immediately, I'll pay you 99 cents on the dollar. 1:12:02 I'll buy you out, and then I'll walk. 1:12:04 These people get like a little yield. 1:12:06 They'll walk the coins slowly. 1:12:09 And yield in Bitcoin or yield in the layer 2? 1:12:13 Well, they would technically buy the L2 coin. 1:12:15 So like let's say I had 100 coin on the L2, 100 Bitcoin on the L2. 1:12:21 I swap it. 1:12:23 I don't want to wait. 1:12:25 So I go to the person who gives me 99 BTC on L1, and they take my L2 coin. 1:12:33 Now, they're collecting all the L2 coins they have in a huge pile. 1:12:37 Like whatever, like 100,000 L2 coin. 1:12:40 When they walk it across slowly, it will be deleted from the L2, and then they'll get 100,000 L1. 1:12:47 So it's allowing equal exchange from the people who do participate in the L2 with the L1, eventual. 1:12:56 Right. 1:12:57 What BIP300 actually does is it keeps track of all the coins that have been sent from the L1 to the L2, 1:13:04 and then it pays them to their new owners eventually after a very slow process. 1:13:08 Okay. 1:13:10 Well, I think I have reached my limit of understanding abstract concepts for today. 1:13:18 But I would love to do another one in about three to six to nine months to understand all the other stuff 1:13:25 because I feel like with the same level of complexity of just following what happened with Bitcoin, 1:13:30 there's a lot of things we can cover, and I have a lot of questions about all those other things. 1:13:34 So I would love to do another one. 1:13:36 Unless there's something else you want to share. 1:13:38 On LayerTwoLabs.com slash download, you can download the software and play around with it. 1:13:44 There's play money. 1:13:45 We have like a signet, and we are also testing with more realistic tests. 1:13:52 It makes it much more look like the real Bitcoin network. 1:13:55 So this is probably a different way to learn. 1:13:59 You can try out the privacy sidechain and the Thunder sidechain. 1:14:03 So, yeah, if you go to LayerTwoLabs.com slash download, you can try it out. 1:14:07 It just says play money, so you won't lose any real Bitcoin or whatever like that. 1:14:11 You can just try our test network and see the software for yourself, 1:14:15 which is probably a better way to learn certain things. 1:14:21 Cool. I'm going to try it. 1:14:23 Thank you so much. 1:14:25 Thank you.